Gift of Property - Posted by RYoung in CA

Real Estate Investing Real Estate Law
1

Posted by GP in WA on April 08, 2004 at 01:29:01:

I disagree with part of eric’s answer, and I wish to add to part of it. However, I don’t want to try to exhaustively explain this, so be aware: I will be incomplete and oversimplifying, so seek advice from a CPA:

Besides the 11k/year exemption, there is a “lifetime” exemption that is now 1.5 million or 2 million and rising over the next five years. She has to file a gift tax return with the IRS if she uses this.

The 250K/500K exemption is only if it was her personal residence for 2 of the past 5 years and she sells it.

If she gives the property to you, you acquire her basis in it - that is, if she paid 5K for it and gave it to you when it’s worth 25K and you sell it eventually for 65K, your capital gain is 60K (this doesn’t include depreciation, improvements, and more stuff). Her gift to you is 25K, and her capital gain is zero.

2

Gift of Property - Posted by RYoung in CA

Posted by RYoung in CA on April 07, 2004 at 11:08:44:

My aunt wants to give me a piece of real estate. We are not sure whether to use a grant deed or quitclaim. Our main question is, how do we do this without incurring taxes? I was advised that using a quitclaim deed and making the transaction for $1 will keep us from incurring capital gains tax. Is this true, or would a gift be better? Will we have to go through escrow? Please help!
Thanks,
Rob

3

Re: Gift of Property - Posted by Frank Chin

Posted by Frank Chin on April 08, 2004 at 08:26:33:

RYoung:

I gone thru gifting RE within the family here, and sat down with CPA’s and attornies. There are legal and other issues.

1- Yes, there are several ways to gift. Each person can gift $11,000 to another person tax free. So if your aunt is married, husband still alive, his name is on the deed, they both can gift you $11,000 each, gifting $22,000 taxfree per year. And if you are married, they can each gift $11,000 each to you and your wife, gifting $44,000 year gift free.

2- The other way is to gift it in one shot, but it’ll use up the unitary credit that your aunt can pass to her heirs at death. If the house is relatively inexpensive, she does not have much other assets, does not have many heirs, it’ll be OK. In our case, the attorney advised against it because my wife has a few siblings, her mom has many other assets, RE is expensive in NYC (800K for a 3 family now), so using it up early on is a NO NO. In NYC, even a $2MM unitary credit does not go far. It was 600K when we did it.

So, spending a few dollars on an estate attorney may be worth it.

3- Our attorney also recommended against gifting thru a large note, and having the donor forgiving it over a long period. So for instance, if the FMV is $110,000, and the note is forgiven over 10 years in 10 increments, my attorney ask "do you want to kiss your mother in law’s @ss for the next 10 year as she can stop forgiving at any time.

So the optimal time is 3 years (or even less), with the note carrying some imputed interest to be legal. My attorney discussed ways to reduce the gifting period if the equity is large, and I can give you some insights if its needed.

4- Also, the donor is responsible for gift taxes, and an appraisal should be done for the record. We did that. Someone I worked with gifted an apartment building to his daughters, but failed to get an appraisal. He got an audit notice from NY State, and he had to get an appraisal for the time of the gift to document the gifting. So putting down a transfer at $1.00 will not cut it in NY State.

Frank Chin

4

Re: Gift of Property - Posted by eric

Posted by eric on April 07, 2004 at 15:34:51:

There are two types of tax that you need to consider - Estate/Gift Tax and Capital Gains Tax.

How much is the property worth?

Your aunt can gift up to a certain dollar amount without gift/estate tax applying (I’m not sure what that is in 2004, but it was previously $11K/year/person). Say the property is worth $110K. She can give you 10% of the property per year without taxes (actually, she can give you more than that because she can discount the value of a share as a percent of the whole - consult a tax professional on this). Down side is it takes a number of years to get the property.

If you want to take title to the property right away, she can sell it to you and carry back the note and deed of trust herself (she may have capital gains if over the exemption - $250K single, $500K married). Then, she can forgive up to the exempted gift amount per year on the note until it is totally forgiven. Same result as above, just that title is vested in you 100% up front. If she forgives the entire note right away, she will have to pay gift/estate tax on it.

She can sell you the property, but then she would be subject to capital gains taxes (if the gains were more than her exemption). Issues can arrise when someone sells property for $1. Often, this would be considered a disguised gift. The IRS and Franchise Tax Board is pretty wise to this.

You do not have to go through escrow. She can just execute the deed then record it. Done.